Disruption will yield opportunities across global markets and asset classes in 2018, according to PineBridge Investments, a leading global investment manager.
“Following years of false starts for growth in the global economy, we expect many markets to reach a high point in 2018. For the first time in five years, growth will be above long-term averages. In our view, this environment will not benefit all assets equally, requiring investors to be both active and selective to make the most out of their portfolios,” said Greg Ehret, CEO of PineBridge, in its annual Global Investment Outlook, which outlines the firm’s view on the opportunities and risks for investors in the year ahead.
“Heading into 2018, we are seeing disruption of all kinds create opportunities in markets. As investors and stewards of our clients’ long-term obligations, we have a responsibility to stay ahead of the latest market challenges and provide timely insight into these opportunities.”
- Economic forecast: Global GDP growth forecast raised to 3.6% in 2017 and 3.8% in 2018; re-synchronisation of global growth improves fundamentals; manufacturing-based business investment rebound to begin
- Multi-asset: Financial and technology sectors are strongest beneficiaries of reflation; China not on the verge of drastic growth slowdown
- Fixed income: Opportunities in higher-quality credit risk in more non-traditional areas – components of emerging markets debt, CLOs, and dynamic opportunistic credit
- Equities: Alpha opportunities in Asia, Japan, Europe, small and midcap stocks, as well as global industrials and technology-related industries; smart capex, new technology, and selection the focus.
Highlights from the 2018 outlook are:
Economics: Disruption pays dividends in global growth
The great financial crisis ended the last sustained period of synchronised global growth. In 2018, the global economy will finally experience that growth once more. Markus Schomer, chief economist, sees a number of disruptions on the horizon:
- In 2018, we expect a manufacturing-based business investment rebound to begin, which will send a powerful stimulus along the global manufacturing supply chain.
- The resynchronisation of global growth should improve fundamentals sufficiently to support the ongoing risk-on rally in financial markets through 2018.
- Quantitative easing will continue to expand and support markets until 2019, when central banks will begin to withdraw liquidity for the first time since the financial crisis.
The economics team also notes that Europe’s growth surprise should continue, with the threat of some political risk; while Japan is benefiting from stronger global growth, and emerging-market fundamentals are improving. Global GDP forecasts have been raised to 3.6% in 2017 and 3.8% in 2018. For US GDP, growth forecasts have been revised to 2.3% in 2017 and 2.7% in 2018; for Europe GDP, 2.4% for 2017 and 2.3% for 2018; and for Asia GDP, 5.7% in 2017 and 5.6% in 2018.
Multi-asset: Investing into an era of disruption
The reflationary regime is unfolding as we have expected: a reflation of confidence, followed by growth, investment, and, finally, inflation with the removal of stimulus. While nearly all assets look expensive when looking at current cash flow, some will be able to grow these cash flows into today’s prices and beyond.
“We favour growth assets – asset classes like equities, developmental real estate, and timber – whose cash flows will be enhanced by the accelerating global economy. We see two sectors that are particularly strong beneficiaries of reflation: financials and technology, and we also like small-cap and value stocks,” said Michael J. Kelly, global head of multi-asset.
PineBridge’s multi-asset team looks for opportunities where companies, sectors, and asset classes are on the offensive, are investing in productivity-enhancing technologies, and are growing by disrupting others’ business models.
“Expectations are also ripe for disruption. Today’s consensus believes that China is about to experience a big slowdown. Not us,” added Kelly. “Most analysts believe that we are late in the global business cycle. We instead see many classic early-cycle characteristics. Finally, consensus would tell you that while active management may be poised to outperform, it’s too expensive and will be crowded out in portfolios by stepped up investments in private assets. We disagree.”
Fixed Income: beta returns are facing policy disruptions
In 2018, PineBridge expects fixed income markets to shift from conditions that provided persistent tailwinds toward a multi-year period of mild, but steady, headwinds. While global central bank balance sheets will continue to collectively expand, 2018 represents a transition year between expansion and contractions. This is setting the stage for shifting and more volatile interest rates and a normalisation of inflation. Investors will need to obtain more from fixed income portfolios through alpha sources, whether via asset allocation or security selection, while managing the risks ahead.
“In this environment, we see the best opportunities in higher-quality credit risk in more non-traditional areas of fixed income – the areas where portfolios tend to be underinvested. These include components of emerging-markets debt, tranches of collateralised loan obligations (CLOs), and more dynamic opportunistic credit,” said Steven Oh, global head of credit and fixed income.
He further notes:
- In terms of central bank policy, the pivotal change and influence lies with the ECB and with the Bank of Japan.
- In emerging markets, fundamentals should be supportive of fixed income and act as future tailwinds.
- Technological disruptions may represent an opportunity in equity markets, but are primarily a risk in fixed income markets.
- Loans represent a relatively attractive asset class with defensive characteristics. CLO tranches offer favourable risk-adjusted returns.
Equities: At long last, fundamentals take the driver’s seat
Going into 2018, PineBridge sees a solid environment for equities: Europe, Asia, Japan, and the US are all showing synchronised growth. Order books are generally healthy, and earnings expectations, on average, are being revised up. At the same time, central banks remain very supportive of markets. Companies are early in their investment cycle as they look to increase productivity and raise their competitive advantages through bolt-on deals. All this points to increasing opportunities for active, bottom-up investors.
Price correlation among stocks within sectors and markets has dropped sharply, suggesting that company fundamentals – rather than liquidity – are driving stocks. The PineBridge equities team expects a new wave of “smart capex” and strategic investments to create the corporate winners of 2018 and beyond. Rising investments in smart capex, driven by investments in new technology to create new levels of customisation, will create opportunity by widening the gap between winning companies and underperformers.
“The good news for equity investors is that company fundamentals are turning up. For the first time in the last nine years, earning expectations are solid and improving, most notably and recently in Europe, Asia and Japan,” said Anik Sen, global head of equities. “Opportunities will be driven by selection – no longer at the market index level but what is happening within them. The next several years will be a different investing period compared with the last nine and will be particularly attractive for active management.”